What Do Recent Market Gains Mean For Your Portfolio?

The market surge since the U.S. presidential election has pushed the Dow Jones Industrial Average above a record-breaking 20,000 in recent days, resulting in some big headlines and optimistic predictions. While the gains are welcome, some investors may wonder why their portfolio's performance might not match that of the Dow.

When commentators talk about "the market" being up or down, they're typically citing performance of an index such as the Dow or the S&P 500®. But it's important for investors to understand that these commonly cited indexes represent only one piece of the overall market. Each is a measure of U.S. large-cap stocks, with the Dow consisting of just 30 companies and the S&P consisting of about 500.

The global stock market includes far more than just U.S. large-cap stocks, with thousands of companies across U.S. small-cap stocks, international developed markets and emerging markets. And beyond stocks, the market also includes various types of bonds, real estate, commodities, cash and other investments. To understand how the entire market has performed and how that might impact your diversified portfolio, you need to understand how each of the indexes that measure these various market segments performs.

The benefits of diversification, or spreading your bets

Furthermore, smart investors don't just invest in U.S. large-cap stocks, which can be highly volatile, as evidenced by the S&P 500's "correction" of more than 10% in the first few weeks of 2016. Instead, investing in a diversified portfolio that includes a mix of different asset classes can help moderate the ups and downs of investing while working toward your financial goal.

Each investment in a portfolio serves a particular purpose:

Stocks can provide growth over time but come with potentially high volatility.

Bonds can provide income and are typically less volatile than stocks, helping moderate the ups and downs of a diversified portfolio.

Commodities and real estate can help provide potential inflation protection.

A diversified portfolio that matches your risk profile might outperform the Dow or S&P 500 at some times and underperform at other times. In recent weeks, more aggressive portfolios that emphasized stocks tended to perform best, while in early 2016 conservative portfolios that emphasized bonds did better. The goal of diversification is to combine investments with different characteristics into a portfolio that can help you reach your financial goals over time, while also allowing you to sleep at night.

Staying focused on your financial plan is key to long-term success

Schwab Intelligent Portfolios® is designed to recommend a diversified portfolio consistent with your risk profile. We give you several ways to measure your diversified portfolio's performance. First, you can compare your portfolio with several different market indexes across various asset classes. This can give you a better idea of how each of these market segments has influenced your portfolio's performance, rather than looking at just one index like the Dow or the S&P 500. You can include up to five different indexes at a time across various types of stocks, bonds and commodities. Just click on the Performance tab after you log into your account and then the Select Index link to choose your desired indexes.

Second, our Goal Tracker feature allows you to set up a savings or income goal when you open your account and then track your progress toward that goal over time. Staying on track toward your goal is a more relevant measure of performance and is the reason for investing in the portfolio in the first place. Staying focused on your goal, ignoring the noise of daily market movement and sticking with your plan through the inevitable ups and downs are among the keys to long-term investment success.